Hedging against ‘peak oil’

Previously, we have had a discussion about how to invest in a way that protects you from inflation, at least to some extent. Another risk worth considering is that fossil fuel availability and affordability might decline sharply in coming decades. This could be the product of any combination of declining output and rising demand, resulting in greatly increased prices and reduced availability. Such an outcome is especially likely if we resist the pressure to chase down every unconventional oil and gas deposit as conventional fields continue to decline in their production.

Both in terms of life choices and investments, it seems like there are behaviours that can be adopted to reduce vulnerability to peak oil. Of course, there are associated costs. Putting solar panels on your roof to reduce dependence on the grid is expensive; so too is investing in assets that are less vulnerable, but which have a lower return associated. The challenge, then, is to assess whether peak oil is a genuine risk across the next half-century or so, as well as identify the most cost-effective responses to deploy if it is decided that the risk is a meaningful one.

What about going the extreme route, taking yourself off the grid, living in an agrarian self-sufficent sort of way? At least in Canada where land and space is plenty, and telework and telecommuting makes it possible to still work a high-paying job while living in a remote location, I think this is very doable.

I think the city is the last place I would want to be when things start to break down… On the one hand you would have a certain quality of life, as long as the rule of law is continued to be respected… but once the rule of law is no longer respected, you have quite the potential for angry mobs and all sorts of nastiness that large groups of people living close together brings… hasn’t anyone ever watched a George A. Romero movie? ;-)

How about re-evaluate one’s existing finances given a five or ten fold increase in energy costs? Of course, this is hard to tabulate because everything has energy costs built in.

E.G., if you drive a car, can you afford to drive it at 5$ a liter? 10$?
If your electricity bill is 5cents per kwh, can you afford to use lights at 50 cents/kwh? Stove? etc..
How much would your food cost with radically higher energy costs?

At the end of the day, the most important thing is food. And frankly, it terrifies me, because i have no idea how to make it, it’s just something I buy at the store. Sure, we grow some tomatoes in our rooftop garden, and I have a bean plant growing out my window, but I can’t concieve of growing enough food to sustain myself. Is it possible in a city?

Even if food, electricity, heating, and transport cost ten times as much, I think I could manage.

A standard meal for me is a $0.99 can of beans and some onions. If canned beans got really expensive, I could always soak the much cheaper dried ones. I think I will always be able to outbid most of the world’s population, when it comes to buying staple foods.

I don’t actually need any transportation at all. I live close enough to work to walk, and the same is true for key shops. When the roads are ice-free, I can cycle.

I don’t air condition, and could afford to pay more for winter heating, while also using even less of it.

I pay about $0.73 per day for electricity, and I could pretty easily use less. For instance, I could turn off and unplug my wireless router when not home, disable my freezer, and do less laundry.

All told, I think I am a lot less vulnerable to high energy prices than most Canadians. The biggest risks come from the knock-on effects of high energy prices, which are hard to predict. For instance, would oil prices rising to many hundreds of dollars a barrel over the next 30-40 years bankrupt the government pension system? Would they wreck the value of other investments?

It is people who work in an urban area but choose to live in a rural one who will really be in trouble. For instance, there are people who choose to live on big lots many tens of kilometres out of town, then commute every day.

Milan, so you think you can afford all the price increases and just walk to work etc. It all hinges on there continuing to be a job to walk to though doesn’t it? If your income goes, so do all your plans. As for using less electricity, yes, you could, you could even use none, especially if the grid goes down because nobody invests anything in something that so few people can afford anymore. Do you think all those powerstations and infrastructure will be maintained just for the few people that can afford 10 times todays prices. Your thinking like an economist. The fact is that everything is interconnected. If a large proportion of people can’t or wont’ consume something in large enough quantities anymore, the system that keeps up supply fails……….one system failing brings on other systems failing………like dominos our entire civilisation starts to fall apart. By the way, while your walking to work………you’ll probably be killed for your shoes by one of the multitudes that can’t afford a tin a baked beans anymore.

There is, of course, a cost and a risk associated with hedging. Money you spend on ‘independence’ resources will be wasted if they are never needed. Likewise, living a life that is as energy and food independent as possible means missing opportunities to do lots of pleasant things.

Nobody wears a bulletproof vest all day and all night to hedge against the risk of being shot. Similarly, there is a need to balance costs and benefits when it comes to hedging against peak oil (or any other such plausible but uncertain phenomenon). The goal is not 100% protection – which is impossible anyways, in the face of societal threats – but a sensible balance between costs, sacrifices, and risks retained.

Jun 4th 2009 | PHOENIX
From The Economist print edition
Gun-owners are on the defensive

AT THE National Rifle Association’s 138th annual convention, held this year in Phoenix, Arizona, 65,000 people poured through the doors. They admired the fancy firearms, snacked on grilled buffalo and were happily recruited by shooting associations. Tom Power, of the Texas Gun Collectors Association, says membership has been soaring since Barack Obama took office. Bill Bachenberg, the owner of a shooting range near Allentown, Pennsylvania, has been registering 400 new members a month. “American gun-owners don’t trust this administration,” he says.

American gun sales surged after Mr Obama was elected president. He had a voting record of raising the tax on guns and ammunition by 500%, and, on top of that, he hinted during the campaign that he might restrict gun sales and create a national registry of gun-owners. The election was seven months ago, and the buying spree has not flagged since. Data released by the FBI’s National Instant Criminal Background Check System, which serve as a gauge of actual sales, reported 1,255,980 checks in April 2009: a sixth monthly increase, and a 30.3% increase from the 940,961 reported last April.

I guess it was my training as a scientist that emphasized to me that conclusions are tentative (I was two years into a Ph.D. in chemistry before I decided the job prospects were better for a chemical engineer). They are subject to revision as additional data come in, and you have to always be willing to consider that you may be wrong. But acknowledging that I could be wrong has to go hand-in-hand with the consequences of being wrong.

I spend a lot of time thinking about the possible consequences of peak oil. My view on peak oil is that it presents an enormous challenge for humanity, that we will begin to face these challenges within 10 years, and that there is no easy solution. I see spiking oil prices and the subsequent fallout as a prelude to what lies ahead. These views have influenced my profession, where I have chosen to live, what I read, and what I say to others. Fear of peak oil has influenced some people not to attend college, or to quit their jobs and move away to remote locations. It has even caused some people to decide against having children. But what if I am wrong about the timing of peak oil? What are the consequences?

For me, this one has low consequences. If I am wrong and we have adequate oil supplies for the next 40 years, then perhaps I live a more frugal life than I might have otherwise. I prefer to walk, ride a bike, or take a train instead of hopping into a car to drive some place. When I drive, I probably drive a smaller car than I would have otherwise. Then again, I have always been frugal, so perhaps I would have done all of these things regardless. The one thing that it may have impacted upon in a major way is my interest in energy.

Efficiency gains can help reduce agriculture’s dependence on oil. In the United States, the combined direct use of gasoline and diesel fuel in farming fell from its historical high of 7.7 billion gallons (29.1 billion liters) in 1973 to 4.2 billion in 2005—a decline of 45 percent. Broadly calculated, the gallons of fuel used per ton of grain produced dropped from 33 in 1973 to 12 in 2005, an impressive decrease of 64 percent.

One reason for this achievement was a shift to minimum- and no-till cultural practices on roughly two fifths of U.S. cropland. But while U.S. agricultural fuel use has been declining, in many developing countries it is rising as the shift from draft animals to tractors continues. A generation ago, for example, cropland in China was tilled largely by draft animals. Today much of the plowing is done with tractors.

Only 14 of the 54 oil producing nations in the world are still increasing their oil production. The era of cheap oil is definitively over, as shown below.

Is peak oil real? The BP Statistical Review of World Energy provides the data needed to answer this question. Using the 2009 edition, I have compiled a list of all oil producing countries and regions in the world, along with the production status of each, ordered by year of peak production. BP groups minor producers into categories like “Other Africa”, and “Other Middle East”, and that notation is used here. All production numbers are quoted in thousands of barrels/day.

Only 14 out of 54 oil producing countries and regions in the world continue to increase production, while 30 are definitely past their production peak, and the remaining 10 appear to have flat or declining production. Put another way, peak oil is real in 61% of the oil producing world when weighted by production. Since 2008 capped a record run for oil prices, most countries and oil companies were trying all-out to increase production. While a handful of producers (think Iraq) might be limited by above-ground factors, the majority of producers simply couldn’t do any better in 2008.

However, careful examination of the world’s resource base — including my own firm’s analysis of more than 800 of the largest oil fields — indicates that the resource endowment of the planet is sufficient to keep up with demand for decades to come. That, of course, does not mean that the oil will actually make it to consumers. Any number of “aboveground” risks and obstacles can stand in the way, from government policies that restrict access to tax systems to civil conflict to geopolitics to rising costs of exploration and production to uncertainties about demand. As has been the case for decades and decades, the shifting relations between producing and consuming countries, between traditional oil companies and state-owned oil companies, will do much to determine what resources are developed, and when, and thus to define the future of the industry.

There are two further caveats. Many of the new projects will be bigger, more complex, and more expensive. In the 1990s, a “megaproject” might have cost $500 million to $1 billion. Today, the price tag is more like $5 billion to $10 billion. And an increasing part of the new petroleum will come in the form of so-called “unconventional oil” — from ultradeep waters, Canadian oil sands, and the liquids that are produced with natural gas.

A common theme in conversations of the peak oil/limits to growth aware is ‘What do I do’? Just slightly less common is ‘What do I do with my money?’ The biggest difficulty in contemplating/deciding/acting towards a new paradigm is one does this while the old paradigm is still going strong, if only on the surface and the media. In a temporary departure from usual Campfire topics, tonight’s discussion will revolve around the concept of investments, and the coming transition from the old finance based rules into new undefined territory.

It’s probably too late to prepare for peak oil, but we can at least try to salvage food production.

By George Monbiot. Published in the Guardian 16th November 2009

I don’t know when global oil supplies will start to decline. I do know that another resource has already peaked and gone into freefall: the credibility of the body that’s meant to assess them. Last week two whistleblowers from the International Energy Agency alleged that it has deliberately upgraded its estimate of the world’s oil supplies in order not to frighten the markets. Three days later, a paper published by researchers at Uppsala University in Sweden showed that the IEA’s forecasts must be wrong, because it assumes a rate of extraction that appears to be impossible. The agency’s assessment of the state of global oil supplies is beginning to look as reliable as Mr Greenspan’s blandishments about the health of the financial markets.

If the whistleblowers are right, we should be stockpiling ammunition. If we are taken by surprise; if we have failed to replace oil before the supply peaks then crashes, the global economy is stuffed. But nothing the whistleblowers said has scared me as much as the conversation I had last week with a Pembrokeshire farmer.

Wyn Evans, who runs a mixed farm of 170 acres, has been trying to reduce his dependency on fossil fuels since 1977. He has installed an anaerobic digester, a wind turbine, solar panels and a ground-sourced heat pump. He has sought wherever possible to replace diesel with his own electricity. Instead of using his tractor to spread slurry, he pumps it from the digester onto nearby fields. He’s replaced his tractor-driven irrigation system with an electric one, and set up a new system for drying hay indoors, which means he has to turn it in the field only once. Whatever else he does is likely to produce smaller savings. But these innovations have reduced his use of diesel by only around 25%.

Looking still further out, the booming economies of China, India and other developing countries are set to need much more fuel in years to come. The rich world should eventually rediscover its thirst, too. Non-OPEC supplies, which have grown in recent years, may start to decline in 2012. New wells will fail to plug the gap left as older fields dry up, despite the investment that 2008’s higher prices encouraged. OPEC is likely to respond by calling on its spare capacity—belonging mainly to its biggest member, Saudi Arabia. OPEC is tight-lipped about how much it has on tap. Some estimates put it at about 5m-6m bpd, though others think the amount that could readily hit the market is much lower.

Such calculations determine estimates of when demand will begin to outpace supply, a circumstance that, just as in 2008, is likely to cause precipitous price spikes. Jeffrey Currie of Goldman Sachs reckons that demand could be “bumping up” against capacity in 18 months. Other analysts with greater doubts about global growth and more optimism about OPEC’s capacity give it four years or more. Given the havoc of 2008 neither OPEC nor oil buyers are likely to greet the moment with a party, let alone a run of special stamps.